By your logic Apple's business model is presumably doomed since they operate the iTunesStore at break even rather than trying to make a profit. You don't need to make a profit on every individual item you sell. Look up loss leader.

BTW Amazon has previous said that Kindle owners purchase much more from Amazon than the average customer.

The iTunes store is inconsequential to Apple's bottom line. And, it does not lose money. And the hardware it supports is sold at a very healthy profit, thank you.

Amazon has "previously said"? Did thy put out numbers I might have missed?

Ignoring their lackluster profits completely I'm amazed that Amazon's Kindle category is only up 177% YoY. That's all their eReaders with a new touchscreen version and new lower priced for the entry level model AND their media tablet. That's just pathetic when you've added so much to that oddly grouped category. For comparison the iPad was up 111% YoY and it had been out 6-9 months so it wasn't a new product added to the product category like with the Kindle Fire.

Something to remember here is that without clearly stated sold units numbers, we're only taking their word that a 177% increase in Kindle sales is accurate. Since they don't have the conviction to release hard numbers, that random percentage has to be taken with a grain of salt.

By your logic Apple's business model is presumably doomed since they operate the iTunesStore at break even rather than trying to make a profit. You don't need to make a profit on every individual item you sell. Look up loss leader.

BTW Amazon has previous said that Kindle owners purchase much more from Amazon than the average customer.

There is a major difference. Apple sells iPads, iPods, iPhones, etc very profitably. iTunes is a freebie that helps them to sell the profitable item - and they're not losing money on it, it's break-even.

The Kindle Fire is the exact opposite. They're selling the expensive item at a loss in the HOPES that they'll sell enough media to make up for it. There are several problems with that:

1. The loss is very large and the media is cheap. Amazon's average net is about 1% of sales. You need to sell 500 $10 books to make up a $50 loss. Or 500 $0.99 games if the loss is only $5 per unit. Since Amazon is not talking about ANY of those numbers, it's impossible to say how much they lose or how many books/videos/apps they sell per Kindle and it is therefore impossible to say whether they have any hope of recovering the losses.

2. We do, however, know the big picture. Amazon's profits were down by 58% last quarter. Apple's were up more than 100%.

Gee, I wonder which strategy makes more sense? A loss-leader only makes sense if you hope to make enough on the consumables to recover the losses-and there's absolutely no sign that this is the case.

Quote:

Originally Posted by gcom006

The Fire/Amazon model has a much better chance of being profitable than Android in general,

Actually, even that isn't clear.

There are really 2 Android models for tablets:
1. Amazon's 'sell it at a big loss and hope to make it up on media'
and
2. Everyone else's 'try to sell it at a price where you can make a profit'

Now, it is likely that #1 will produce higher volumes, but in terms of profitability, that's not clear at all. The Samsung division that sells tablets made more money last quarter than the previous year. Amazon did not. Of course, there's nowhere near enough data to be sure how much profit (if any) came from tablet sales in either case, but there is also not enough to justify your claim - and your claim certainly doesn't fit with the known facts (see above).

"I'm way over my head when it comes to technical issues like this"Gatorguy 5/31/13

This is just getting started. They'll probably have to pull or scale back Fire at some point.

I take great comfort in the notion that they think all that is necessary to own a market is to employ the Win 3.x strategy of going into debt and saturating the embedded world with sub-iPad quality crap and they'll own the space.

They will pull the plug on Fire or it will increase in price to compensate for the quarterly loss it will take this upcoming quarter.

Amazon doesn't have the capital of Microsoft to draw upon and subsidize a loss leader hoping it will be respectable against Apple's iPad.

The Tablet space is Apple's domain. The iPad 3 will vastly expand the distance between the rest of the competition and consumers will increase their purchases on iOS further making it clear that there is one champion in this space.

Or they'll have to start charging more for them, taking away the only "real" advantage they have over the iPad. My guess is that they are not going to see the revenue stream from Fire users that they've built this model on. It's just not a sustainable model, unless they can get enough book sales and proprietary app sales to cover the cost - and I'd hate to be an Amazon accountant trying to determine how and where they're accounting for any recoup in cost.

it's not book or app sales but cloud computing sales. most of the backend processing for ios and android apps is done on amazon's cloud.

That Wind Farm is being built in Whitman County, home of my alma mater, Washington State University which is also home to the lead researchers on the US Smart GRID with Professor Bose. [http://researchnews.wsu.edu/physical/260.html]

2012 is the year where 500MW to 1000MW of Wind Power is scheduled to go online in the Washington State with ten times that moving forward. Lots of rollling Wheat fields, Barley, Lentils, etc., and all that wind.

There are plenty of players coming into view that fulfill Apple's needs for clean, affordable and abundant energy with a massive fiber backbone.

But PE doesn't work that way. It uses EPS over the last four quarters, which is a big difference for a cyclical company like Amazon. And I wonder if you were saying the same thing about AAPL when that stock's PE was over 100.

And market cap never needs to be "justified." It is what ever the market says it is.

"Justified" isn't the right word, but I think the sentiment is that the market will self-correct because, as you say, it is whatever the market says. The market can inflate or deflate something for a short-term, but over the long haul it will reach a point of equilibrium.

Why? The Kindle Fire is not what compressed margins this quarter. Amazon's margins have been suppressed for the past few quarters due to the huge spending on physical warehouse construction, cloud infrastructure build-out, video on demand build-out, and feature discounts. Amazon continued this trend with $500 billion USD in infrastructure expenditures.

What came out of the blue was Amazon's buy back of 1.6 million shares of stock at over $600 million USD. It has been a while since they bought back stock. Net income would have been over $750 million USD instead of the $177 million USD without the buyback.

I am glad to see the investments to improve their physical and financial positions.

This was hardly a miss. Amazon managed a $0.38 per share earnings, crushing the street's estimste of $0.17.

You're thinking of things in terms of cash-out. Cash has no direct bearing on the income statement. For instance, the infrastructure is an investment, not an expenditure. It will be recorded as an asset, and then depreciated (an expense) of the next X years. I believe the buy back would be recorded as equity, also not an expense.

This all affects the statement of cash flows, but the not the income statement, which is affected by expenses accrued during the period and revenues earned.

This sell for loss, recoup later model works if there is some sort of contractual obligation on the users to consume services from Amazon. Or if the device is pointless without Amazon services.

In this case, the Kindle Fire is a perfectly fine tablet (or maybe I should say a fine low end tablet!), even without Amazon services. So there is a strong incentive to buy this cheap tablet and not consume any content from Amazon!

In such a scenario, how will Amazon recover its losses? For instance, the Kindle Fire is sold in India for Rs 13,000. Or about $260. This extra $60 is the scalpers margin - and does not go to Amazon. Amazon does not even sell content in India. So on all the devices bought in India, Amazon would be just writing off its losses. I am sure the situation in China would be an order of magnitude worse for Amazon.

It really does not matter how many tablets Amazon sells, if these tablets end up in India and China! They will never get the ecosystem kicker they are hoping for.

It is for this reason that Amazon's actions are really a major positive for Apple. All Amazon will achieve, is destroying the market for Android tablets, bifurcating the ecosystem, etc. And lose lots of money in the process! Samsung and Motorola will be losing more because of Amazon - and Apple will actually benefit in long run.

More than Oracle, more than Apple, it is Amazon that will really destroy Android.

More than Oracle, more than Apple, it is Amazon that will really destroy Android.

I don't know about destroying but the Fire certainly isn't helping Android OS create a cohesive platform. If Samsung, the only truly successful vendor utilizing Android OS, forks it like Amazon then Android really starts to hurt. If that happens it might very well be the platform for cheap feature phones.

This bot has been removed from circulation due to a malfunctioning morality chip.

Remember, Amazon does not really have anywhere near the volumes that Apple has - and Apple has other related products which add up to significant cost benefits.

Amazon reported about $130 million lesser in profits this year. If you assume that this entire amount was just because of Kindle, and if you accept they sold about 6 million devices, that gives a figure of $22 per device. But if you consider their significantly higher revenues ( outside of electronic devices as well - in their online store biz) it is natural to expect correspondingly higher profits. With this factored in, the average loss per device works out almost $50!

I think the truth is somewhere near $30 per device, and Amazon is bleeding elsewhere because of too much attention on the Kindle.

Was Apple selling for a hundred times earnings? If anyone paid that, they weren't smart...they were lucky. Because it would have been impossible to know that the iPhone and iPad would be created and take over the world.

In any case, Amazon's business model does not lend itself to some sudden miraculous new stream of earnings. And it's growth rate absolutely does not justify such a high multiple.

And anyone saying that the valuation makes sense just because that's what "the market" says, go back and look at what happened with many stocks during the Internet Bubble. I rest my case.

The PE for AAPL was over 200 in 2001-02 and didn't decline below 100 until 2004. So as in investor during this timeframe, you could take that high valuation two ways. Either the company is being highly overvalued by investors who will get burned, or investors have rightly anticipated the beginnings of a huge growth story. So before you call it luck, consider which scenario turned out to be the correct one.

I don't necessarily disagree with you on AMZN and as I said this is not a bet I am going to make. But others will feel differently just as others did about AAPL, and they most certainly lost out. That's all in the nature of markets.

So your case is hardly rested, it's constantly being tested.

Quote:

Originally Posted by anantksundaram

What did it have to do with? Cooking?

Nice reply. Stock markets can't be called "finance," any more than a casino can be called a bank. If you are expecting rationality from markets you are looking in the wrong place.

"Justified" isn't the right word, but I think the sentiment is that the market will self-correct because, as you say, it is whatever the market says. The market can inflate or deflate something for a short-term, but over the long haul it will reach a point of equilibrium.

I don't know that I'd called it equilibrium. That word suggests that some sort of final or at least stabile balance will be achieved in the markets. The markets are all about everyone trying out outguess everyone else about what the future will look like. You're not going to get to much equilibrium that way.

This sell for loss, recoup later model works if there is some sort of contractual obligation on the users to consume services from Amazon. Or if the device is pointless without Amazon services.

In this case, the Kindle Fire is a perfectly fine tablet (or maybe I should say a fine low end tablet!), even without Amazon services. So there is a strong incentive to buy this cheap tablet and not consume any content from Amazon!

In such a scenario, how will Amazon recover its losses? For instance, the Kindle Fire is sold in India for Rs 13,000. Or about $260. This extra $60 is the scalpers margin - and does not go to Amazon. Amazon does not even sell content in India. So on all the devices bought in India, Amazon would be just writing off its losses. I am sure the situation in China would be an order of magnitude worse for Amazon.

It really does not matter how many tablets Amazon sells, if these tablets end up in India and China! They will never get the ecosystem kicker they are hoping for.

It is for this reason that Amazon's actions are really a major positive for Apple. All Amazon will achieve, is destroying the market for Android tablets, bifurcating the ecosystem, etc. And lose lots of money in the process! Samsung and Motorola will be losing more because of Amazon - and Apple will actually benefit in long run.

More than Oracle, more than Apple, it is Amazon that will really destroy Android.

amazon sells tablets
more people use the apps from amazon app store
amazon attracts more developers
developers use Amazon's cloud services to host content and data for their apps and pay amazon

The Kindle Fire is the exact opposite. They're selling the expensive item at a loss in the HOPES that they'll sell enough media to make up for it. There are several problems with that:

1. The loss is very large and the media is cheap. Amazon's average net is about 1% of sales. You need to sell 500 $10 books to make up a $50 loss. Or 500 $0.99 games if the loss is only $5 per unit. Since Amazon is not talking about ANY of those numbers, it's impossible to say how much they lose or how many books/videos/apps they sell per Kindle and it is therefore impossible to say whether they have any hope of recovering the losses.

The flaw in your logic is Amazon sells much more than media. They want to be the one stop shop for everything you buy. Even if they never make up the loss selling media, they are still up if you become a loyal Amazon customer and buy other goods from them.

Think Halo effect. It worked for Apple. Positive experiences with the iPod led to higher sales of Macs.

The flaw in your logic is Amazon sells much more than media. They want to be the one stop shop for everything you buy. Even if they never make up the loss selling media, they are still up if you become a loyal Amazon customer and buy other goods from them.

Think Halo effect. It worked for Apple. Positive experiences with the iPod led to higher sales of Macs.

Well then, Amazon had better make sure that people have a positive experience or that will become the flaw in your logic.

The flaw in your logic is Amazon sells much more than media. They want to be the one stop shop for everything you buy. Even if they never make up the loss selling media, they are still up if you become a loyal Amazon customer and buy other goods from them.

Think Halo effect. It worked for Apple. Positive experiences with the iPod led to higher sales of Macs.

That's true. It doesn't change anything I said, though.

Since Amazon doesn't release any information, there's no way of knowing whether they get enough incremental sales from each Kindle Fire to justify taking a loss. It's harder to make money when you start out with a loss than when you sell your product at a profitable price.

I also suspect that the halo effect is going to be all that great. People already know what shopping with Amazon is like. The number of people who become Amazon shoppers (or who significantly increase their Amazon purchases) because of the Fire is not likely to be very large.

It also requires that the experience be positive. So far, Fire reviews are mediocre.

"I'm way over my head when it comes to technical issues like this"Gatorguy 5/31/13

This is just getting started. They'll probably have to pull or scale back Fire at some point.

Perhaps they do. Or the Amazon story may turn out (somewhat) like the carriers, who take an initial hit by paying Apple the iPhone subsidy but should make up for it with subscription fees. Amazon's version of subscription fees is content sales, which has no time limit. This still might work. For sure, Amazon's accountants has worked out myriad possible scenarios before they made this gamble.

Perhaps they do. Or the Amazon story may turn out (somewhat) like the carriers, who take an initial hit by paying Apple the iPhone subsidy but should make up for it with subscription fees. Amazon's version of subscription fees is content sales, which has no time limit. This still might work. For sure, Amazon's accountants has worked out myriad possible scenarios before they made this gamble.

Probably, but I sure hope they didn't leave it in the hands of the accountants. There are too many assumptions - and the accountants are not equipped to evaluate them.

1. Loss per Kindle. With appropriate input from Manufacturing, the accountants can do this.
2. How many Kindle Fires will be sold? Pure guesswork - and requires their best, least biased people to make this assessment. Note, however, that almost everyone has overestimated how many units their "iPad killer" would sell.
3. How much media or other products Kindle Fire buyers will buy. More importantly, how much more they'll buy than if they didn't have a Kindle Fire. For example, if someone buys 10 books for their Kindle Fire, but if they would have bought the same 10 books for their iPad if they didn't have a Fire, there's no incremental income. Again, needs their best market analysis, not accountants.
4. Time value of money. How much revenue do they need over a 2 year period to make up for a certain loss today? The accountants can do the math, but they're not equipped to make the big decisions.

The fundamental problem with the Fire program is that it was purely a leap of faith. Even the best marketing people would only be guessing on items #2 and #3 above. They invested many millions of dollars in hopes that their marketing people were right. It's far too early to know if it will pay off (even if Amazon DID release data).

"I'm way over my head when it comes to technical issues like this"Gatorguy 5/31/13

Probably, but I sure hope they didn't leave it in the hands of the accountants. There are too many assumptions - and the accountants are not equipped to evaluate them.

1. Loss per Kindle. With appropriate input from Manufacturing, the accountants can do this.
2. How many Kindle Fires will be sold? Pure guesswork - and requires their best, least biased people to make this assessment. Note, however, that almost everyone has overestimated how many units their "iPad killer" would sell.
3. How much media or other products Kindle Fire buyers will buy. More importantly, how much more they'll buy than if they didn't have a Kindle Fire. For example, if someone buys 10 books for their Kindle Fire, but if they would have bought the same 10 books for their iPad if they didn't have a Fire, there's no incremental income. Again, needs their best market analysis, not accountants.
4. Time value of money. How much revenue do they need over a 2 year period to make up for a certain loss today? The accountants can do the math, but they're not equipped to make the big decisions.

The fundamental problem with the Fire program is that it was purely a leap of faith. Even the best marketing people would only be guessing on items #2 and #3 above. They invested many millions of dollars in hopes that their marketing people were right. It's far too early to know if it will pay off (even if Amazon DID release data).

You're right - I misspoke, or miswrote. Accountants would be engaged too, but they won't be the key people.

I think your 4 factors cover the essential ones the accountants likely considered (other factors are in the hands of marketing folks and engineers, I imagine). And I further agree that it's far too early to know if there will be a payoff. But I disagree (and strong at that) that this program is a pure leap of faith. It is a calculated risk, one (possibly) modelled after the carrier programs and also, to an extent, Amazon's own history. Not that long ago, Amazon was given up for dead. Even now, having convinced many on Wall St. that his business model worked, Bezos remains a true entrepreneur and long-term thinker. It is in the Amazon staff handbook to "think big", which is different from leap of faith. And Bezos seems to believe in it 100%. For that, he is admirable in my books. I hope he succeeds.

Perhaps they do. Or the Amazon story may turn out (somewhat) like the carriers, who take an initial hit by paying Apple the iPhone subsidy but should make up for it with subscription fees. Amazon's version of subscription fees is content sales, which has no time limit. This still might work. For sure, Amazon's accountants has worked out myriad possible scenarios before they made this gamble.